The Australian Dollar this week traded down to levels not seen since February 2016 as the bearish trend which has headlines 2018 continues to plumb fresh lows. The downward spiral in AUD this year has been the result of a combination of factors such as the strength of the US Dollar, weakness in commodity prices linked to the US / China trade war as well as weakness in Chinese data.
AUD Under Pressure
The strength of USD this year has greatly increased the USD funding cost for many emerging market currencies which have suffered as a consequence. This has also created a drag on AUD which, due to the current account deficit and exposure to China through trade, has exacerbated the risk status of AUD within the context of G10 currencies. AUD’s sensitivity to the US / China trade war as well as fears of a slowdown in China has lead to capital outflows from EM investors, preferring to trade “safer” currencies.
Chinese Data Weighs on AUD
The recent release of weaker-than-expected Chinese manufacturing data along with weaker-than-expected industrial profits data has confirmed fears that the trade war is negatively impacting Chinese economic activity. Given that China is Australia’s largest trading partner, AUD has long been used a proxy for trading the Chinese economy and periods of weakness have typically translated into AUD weakness, especially when accompanied by weakness in commodity prices which we have seen this year also.
Indeed, the impact of the trade war on world growth can be seen in the latest world trade data which showed a downturn in July, which was the first month that US tariffs on Chinese goods went live. The IMF has consequently indicated that it might revise lower its outlook for world growth at the upcoming October 9th update.
RBA Still Optimistic
However, despite the current slump, the RBA is maintaining a stubbornly optimistic outlook. Keeping rates unchanged for the 26th consecutive meeting this month, governor Lowe continued to cite strong domestic growth and supportive business conditions despite slower growth in China and weaker house prices (along with higher money market rates). However, if growth in China slows down more, the effects on Australia might become harder to deal with especially considering that the country is still suffering from weak household incomes and high levels of household debt.
AUD is now sitting firmly below the .7150s level which was significant support over the last two years. If price close below this level on a weekly basis, the focus will be on a deeper run down to test the 2015 low of .6831.
Ahead of that level, we have the completion of a large ABCD symmetry pattern into the .6948 level which might see some technical buying though ahead of the 2015 low, any retest of .7153 should find resistance.